USA Truck replied that it was focused on management and operational improvements and, “accordingly, the board of directors unanimously decided to decline a meeting at this time.”

Since then, Celadon hasn’t signaled its next move involving what could have been its biggest acquisition yet.

“We were quite disappointed with their reaction, and we decided to consider alternative actions,” Celadon said in a prepared statement.

At the very least, Celadon stands to register a financial gain on its purchase of USA Truck shares. They’ve been down lately, thanks in part to installation of new operating software that caused chaos in USA’s fleet and contributed to a $4.3 million loss in the third quarter.

Celadon in September started buying up shares of USA Truck when they were down some 40 percent from their 52-week high. Celadon paid an average price of $7.08 a share, or about 55 percent of USA Truck’s book value.

With USA’s shares now trading above $8.50, Celadon already stands to net a return of close to $1 million—a number that could move higher. A turnaround strategy recently implemented by USA Truck is expected to improve its performance and, theoretically, its stock price.

Celadon CEO Steve Russell at IBJ deadline said he wasn’t prepared to discuss plans related to USA Truck, which has revenue of $460 million, compared with Celadon’s $557 million.

Even before USA Truck rebuffed Russell’s offer to talk, some analysts were dubious about the potential for a combination of the companies.

That “would be a departure from Celadon’s historical acquisition strategy that typically involves the acquisitions of small, privately held carriers that Celadon purchases for the value of the carriers’ equipment,” said an Oct. 14 report by Stifel Nicolaus analyst John Larkin.

“We believe the investment reflects Celadon’s view that [USA’s] shares were underpriced given the age/condition of its equipment as well as the improving truckload industry fundamentals.”

USA’s tractors at the end of 2010 were an average age of 2.4 years old, which is below industry average, Larkin said.

An outright acquisition of USA Truck could add $3 million, or 13 cents a share, to Celadon’s bottom line, although the analyst noted it might require removing duplicative overhead and that the benefits wouldn’t come overnight.

After taking a break from acquisitions the last two years, Celadon found a few bargains this year, news that’s been overshadowed by the mini-drama involving USA Truck.

On Oct. 20, Celadon bought the dry-van-division assets of Dallas-based FFE Transportation, which consists of a fleet of 435 trailers and 290 tractors. FFE said the deal will bring it $15.5 million.

And on Oct. 7, Celadon snapped up Pennsylvania-based Martini Transportation, which, according to an industry database, had 68 trucks and counted among its customers Miller Beer. Celadon didn’t bother to even announce the deal, with Russell characterizing it as “very small.”

Generally, the companies Celadon bought were “doing lousy,” but when integrated immediately into Celadon, proved to boost its earnings per share, he said.

“We are looking for acquisitions that make sense,” Russell said.

One benefit of acquisitions has been to broaden Celadon’s product mix. In 2002, about 70 percent of Celadon’s cargo was from the automotive industry, primarily Chrysler. Now it is diversified, with Walmart and Procter & Gamble among its biggest customers.

Celadon hasn’t had to look far for acquisitions in recent years.

Not only did the economy start slowing in 2007, but new diesel emissions rules from the Environmental Protection Agency drove up the cost of trucks, making some firms ripe takeover targets.

In 2006, a firm might have purchased a truck for $95,000 and sold a used one for $50,000. A trucking firm could have traded the older truck and secured a bank loan to finance the new one.

But EPA engine rules have driven up the cost of some new units to $130,000 and pushed the value of trade-ins to as low as $20,000. With the spread widening, some lenders won’t write a loan now to struggling, smaller firms. So a firm might have to hold on to a truck longer, which means higher maintenance costs.

“What’s happened in the last couple of years is that the smaller fleets are suffering,” Russell said.

The upside for Celadon is that there are now fewer small fleets competing for the business. Russell reckons smaller fleets have fallen from about 92 percent of the market (representing about 75,000 smaller fleets) earlier in the decade to about 80 percent. “The fragmentation is going away.”

The upside for surviving trucking firms is that the market rates for shipping rise.

Celadon cited reduced capacity in the industry and improvements in the economy in explaining a 7-percent rise in revenue, to $557 million, in its most recent fiscal year ended June 30.

Profit soared to $14.7 million from $4.7 million in fiscal year 2010.

In August, citing confidence in being able “to deliver long-term sustainable growth,” Celadon announced it would begin paying a 2-cents-per-share quarterly dividend, its first.

In the first quarter of the current fiscal year, ended Sept. 30, Celadon reported a 23-percent increase in profit, to $5.4 million. Earnings per share rose to 24 cents, which was in line with analysts’ estimates.

Revenue increased less than expected, rising 1 percent, to $141.5 million. That was less than an average analyst consensus of $151.9 million.

In spite of Celadon’s track record of rolling up weaker competitors, the company’s stock has languished, trading at around $11 a share versus a 52-week high near $17 last spring.

The company, based near East 33rd Street and Post Road, has about 3,500 employees and 1,700 customers. Operating primarily under the Celadon Trucking banner, its fleet of 2,800 tractors and 8,200 trailers carry cargo in the United States, Canada and Mexico.•

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